Page menu

Monday, October 26, 2015

As bullish investors write off the August crash, and look (backwards) to earnings, and forwards to Wed's Fed meeting, and high risk tech stocks, to salvage the bear market rally of the past few years, it's time for us to mentally prepare for the next leg down in what I now see as a continuing bear market. If you were under the mistaken impression that we are in a bull market, The chart below represents the ongoing corrective pattern (bear market) of the past 15 years, and primary wave E's are nothing to play chicken with.

If you recall back in August; I was looking for a capitulation top in a broadening top pattern to take out the previous high set in July, as traders began to return from summer vacation, and put money to work, but then no sooner than I publically called out that trade, the market collapsed.

Technically the August flash-crash was the result of "truncated wave 5", followed by the long awaited return of the great bear market, but I think the timing was no coincidence, and as I've said and documented in the past "we are being watched", and I'm sure even more so now that I have over 900 Twitter followers. Well, "fool me once shame on you; fool me twice shame on me!" Or as The Who said in 1971, "We Won't Get Fooled Again"

We see the same EW count on the NASDAQ (on the chart below) in wave 3, which should confirm that the "August swoon" was in fact only the beginning of a much bigger crash. That reversal could take place at any time, but knowing thus market as I do, we probably won't see it until a little relief rally upon release of the next Fed statement on Wed.

Timing is difficult to predict, but because all wave 3's tend to be devastating, and this is where the money is made (on the short side), I'm prepared to wait as long as it takes; remaining short into weekends as I did this last Friday, and even into this weeks The Fed announcement.

As far as timing the duration of wave 3, I believe it could last several weeks. Liquidity tends to unwind faster than anyone can predict, so we have to be prepared for the worst. Stay short, and try not to catch any falling knives.

I see firm support at the $SPX 1550 - 1575 level, and at least a trade-able rally there, and volatility typically wanes going into the holidays,

Monday, October 12, 2015

Does this rally have legs?

I've been somewhat pre-occupied with calling the top in metals, and miners, so I thought it would be good to take a close look at the broader market, and get back up to speed.

In the last update, we were anticipating a sector rotation, and further market consolidation; and since then we've seen got both. We even saw a short squeeze in many of beaten up stocks we've been watching - including $TWTR, Energy, Emerging markets, China, and even Gold miners.

The $VIX took out my 16.60 target, called-out in my interview with Dale Pinkert at FXStreet.com on Sept 21. Obvious resistance around the 23.50 area, and that becomes the line in the sand, and when the $VIX get's back above that area expect more panic selling.

I believed the market was trading into a sideways consolidation pattern, but the latest rally - as powerful as it was - looks more like wave C of 2, in an ongoing bear market. Turns out that while the emerging markets and gold seem to be trading into the top of a broadening triangle pattern, certain chart views of the US markets look like a continuing bear market in wave 3.

Let's first compare the pattern in Emerging markets to the US. $EEM in a perfect broadening triangle.

Now let's look at the 2 hr., view of the Dow. It's just way too soon to call this a triangle pattern, and could very well be a suckers rally in wave ii of 3. You don't want to be wrong here, and I'm taking no chances, because the next target in wave 3 looks like Dow 14,000 (14,200), which was the breakout point in late 2013. That breakout was on light holiday volume, and that new support was never retested.

All good things must come to an end, and now it's time to take profits, and let the chips fall where they may. We'll know before long if this is wave 3 or not; I'd say within a couple weeks, as this rally has more to do with a pump into OPEX - on Oct. - 15th than anything else.

Friday, October 2, 2015

A lot has happened since last month - a key window dressing month - Sept. turned out to be one of the worst Septembers on record. I was anticipating fund managers would buy the dip, and instead we saw them lighten up on their positions. Just goes to show it's hard to predict what's going to happen one day to the next, let alone the next month, and that's why I spend many hours charting each and every day, and why market timing requires both patience, and constant vigilance.

If you possess these 2 human qualities (patience and vigilance) congratulations! More and more we live in a world that has become increasingly impatient, and one where many folks expect instant gratification. This is exactly the kind of thinking that led to The Fed lowering interest rates to 0, and bank bailouts, in the face of a prolonged economic contraction. I'm talking about the one which started in 2000, not last month, and both are far from over. Of course we would all like crises to be over quickly, but there's a natural order to things. Quick fixes seldom last for very long, and they can even make matters worse, as Peter Schiff often warns.

There's a reason why I'm going on an on about patience, well actually a few reasons.

1. It's important to wait for the pullback, whether it be in beaten down Stocks like Twitter, or GoPro, or countless others - many of which you've seen me tweet, and re-tweet again. It's no fun catching falling knifes, so leave the guessing to other folks, while you wait for your target, or better yet, wait for a retest of support, once the reversal is confirmed. More and more we see a washout below support - in a shakeout - before we see any kind of reversal, and that can take some time. Watching from the sidelines won't cost you anything, and it's always a good exercise in patience.

Here we see a shakeout in shares of Twitter $TWTR followed by a rebound, which is then followed by just the kind of bullish back-test I describe. The Pattern is a parallel channel (seen in blue), and we now see it retesting $25 support. Another thing to note is that you would never find this bottom using a short term chart, and that's a topic for another time.

2. Seemly endless sideways consolidation patterns - AKA sideways corrections - require a huge amount of patience to trade successfully, and there's a good chance we're in just such an extended sideways (contracting triangle pattern in wave 4 right now). This isn't something I just came up with overnight, this was discovered and Tweeted on Sept 30th, but I had already been working on this chart for a couple weeks.

When the market is lethargic and erratic as it is, it's time to start thinking outside the box, and this pattern matches the action we're seeing, and you can learn more about wave (4) triangles in my free Elliott Wave Tutorial.

The August flash-crash spooked investors and traders alike, and this left many looking for the next leg down, but so far we've only seen another washout in a couple areas, namely the Russell 2000, and the Biotech space. This can be attributed to a reallocation of funds going into the end of the quarter - as I mentioned above - but the major indices have in fact not made new lows, and unless we were in a prolonged crash - say in wave 3 - I would never expect that.

You just don't see the market crash in the first leg down (in wave 1). Once you see a crash like this, you would expect an equal and opposite reaction (which we saw), followed by an extended period of consolidation. Also, as I pointed out in an earlier blog, and again on my Sept interview at FXStreet.com; if August support get's taken out there is no support below that (1870ish) level. The August low is key support on some very long term charts. If these levels were to break; the next key support level I would be looking at would be the breakout point to new highs back in 2012 (1550 on the $SPX), which was never back-tested by the way. That previous resistance would become new support. I do see some possible support levels on the way down, but as I stated in that interview "things would become sketchy", if that August support is taken out.

I can't say for sure that we're completely out of the woods as far as a bear market is concerned, but I think we've seen the worst of it for now.

As far as the Russell 2000 this pullback looks a lot like the one we saw in Oct 2011

Receive notification of new EWH blogs by email (RSS feed)

About Me

I use a hybrid blend of technical indicators; cyclicality, sentiment, chart patterns, and more, to analyze the current market environment and provide short and long term outlook. It was never my intention to become a market timer, let alone try to make a living at it! It just came naturally. In 2010 I became a Hall of Fame Author at stochcharts.com after calling the flash crash, the subsequent rebound, and the eventual bottoming of the market in July of that same year. I drew quite a following, and needed more room to write, so I started this blog. Someone suggested I add a PayPal button, and the rest is history. This has all been a great learning experience, and I am very grateful for the opportunity. Please follow me on Twitter for the latest charts and my continuing up to the minute market outlook.